Q4 2019 Earnings Call
Good morning, and welcome to translations fourth quarter and year end 2019 earnings conference call.
I'll be of our press release, covering financial results, along with supporting statements and schedules, including reconciliations on disclosures regarding non-GAAP financial measures are posted on our website a deepwater dot com.
Joining me on this morning's call or Jeremy Thigpen, President and Chief Executive Officer.
Okay, Executive Vice President and Chief Financial Officer, and Roddy Mckenzie Senior Vice President of marketing in contracts.
During the course of this call transition management may make certain forward looking statements regarding various matters related to our business in company that are not historical facts.
Such statements are based upon the current expectations in certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially.
Please refer to our FCC filings for more information regarding our forward looking statements include into risks and uncertainties that could impact our future results.
Also please note that the company undertakes no duty to update or revise forward looking statements.
Following Jeremy and marks prepared comments, we will conduct a question and answer session.
During this time to get more participants that opportunity to speak on this call. Please limit yourself to one initial question and one follow up. Thank you very much I'll now turn the call over to Jeremy.
Thank you, Brad and welcome to everyone participating in transactions fourth quarter and full year 2019 earnings call.
I'd like to start today's call with a recap of 2019.
As reported in Yesterdays earnings release for 2019, the company generated adjusted EBITDA $979 million on $3.3 billion and adjusted revenue, resulting in an industry best adjusted EBITDA margin of 30%.
As I stated many times previously transaction is acutely focused on enhancing the quality of our fleet driving operational excellence through continuous improvement in safety uptime drilling efficiency.
Expanding our position as our customers Universal first choice relationships exceptional operating performance and the introduction of new technologies, and extending our liquidity runway, but adding to our industry, leading 10.2 billion dollar backlog converting the maximum percentage of that backlog to cash and prudently bolstering our balance sheet through timely transactions.
In 2019, we again took actions to further each of these objectives.
Looking first at our fleet in August the transition nor get entered our active fleet commencing her maiden contract with when were Norway. This high specification Harsha Berman asset is the six float are we now have worked for Eleanor and we will soon increased that totaled to seven when we commenced the contractor the parents in Canada quite a testament to the relationship we have built with the industry's largest harsh environment operator.
As a further example, the strength the relationship and transitions abilities to successfully dilbert newbuilds to the industry. We're proud to record the Ecuador has already exercised in August 1st two options.
Speaking of Newbuilds, we are now approximately a year and a half away from the introduction of the world's first 20000, PXI capable ultra deepwater drillship.
Construction on the deepwater Titan has progressed as planned and we look forward to delivering his drillship the chevron for her maiden contract commencing in 2021.
This five year contract will allow chevron to construct and ultimately produce the first fields in its extremely high pressure area, but lower tertiary in the deepwater Gulf of Mexico.
The desire to exploit just basins driven by the exceptional returns Chevron anticipates with development cost for this first deal anchor now estimated to be as low as $20 per barrel.
As reported in our last call. We continue to explore opportunities that would make our final new build asset recently named the deepwater Atlas the world's second 20000 PXI drillship.
With multiple operators, requiring a rig for their ultra high pressure properties in the Gulf of Mexico, The Atlas with its 3 million pound hook load Derek is ideally suited.
In addition to these newbuilds, we've also reactivated and deployed to previously stacked assets.
During the fourth quarter, we completed the first reactivations of assets acquired in the Ocean rig transaction, the deepwater mykonos and the deepwater quick about it.
Both rigs have commenced drilling operations in Brazil to Petrobras in are contracted well into 2021 with options that extended to 2023.
We now have three revenue generating assets in Brazil, enabling us to spread or shore based cost increasing our efficiency in country.
In furtherance of our fleet strategy, we also announced the retirement of six older less marketable assets during the year as such we exit 2019, with 47 floating rigs of which 44 or either ultra deepwater harsh Berman assets.
As we closed 2019, we're proud to assemble the industry's most capable fleet of rigs operated by its most experienced cruise.
This ideally situated us pretty ongoing market recovery.
Moving from sleep quality operational excellence I'm pleased to report that in 2019, we delivered another year of strong uptime performance across our global fleet with uptime of almost 97% in revenues efficiency exceeding 97%.
Well, our ultimate goal is to deliver 100% uptime for our customers. We take pride in these numbers, which reflect improvements on both metrics from our 2018 results and continue a multiyear trend of exceptional performance.
As we strive to drive operational excellence through improvements in safety uptime in drilling efficiency I'd like to spend a few moments discussing some of the differentiating technologies that we're delivering to the industry.
Automated drilling control or 80 see Halo guard ace year and hybrid onboard power represent a few of the technology that focus on the important aspects of drilling work. They shouldnt wells with high rates of penetration, ensuring the safety of our crews assets and the environments in which we operate and reducing fuel consumption carbon footprint and emissions.
Starting with MDC. This system captures critical downhole information while drilling.
Through the use of real time data telemetry and a combination of software applications AIDC enables more efficient well construction in short AIDC as the first step towards automating the wellbore construction process and mixed the entire process safer faster and more reliable.
He sees in the process of being deployed on six of our rigs drilling for Ecuador, Norway. We are actively evaluating the deployment on other rigs in our fleet.
Hello Guard is a transaction patented system designed in collaboration with two of our suppliers that prevents dangerous impacts between moving equipment on the drill floor and our personnel working in the vicinity of that equipment.
Using position sensors and cameras operating with visual recognition technology, the hilgert system since a warning signal to personnel when they are dangerously close to moving equipment.
If the individual fails to remove him or herself from harms way the system will ultimately called the piece of moving equipment to prevent injury to the individual.
Hello Guard is currently being piloted in the Gulf of Mexico, What's prudent we intend to deploy the system across our fleet.
Hey, sheer provides unmatched sharing capability in the event to be well control incident, no matter what may be encountered in the wellbore, including casing joints inner tools Ace your possesses the capability to dust to slice objects and he matter milliseconds, allowing a blow out to be addressed instantaneously.
Needless to say, we're excited about Asia as this game changing technology provides a level of assurance enterprise risk reduction not previously available in the offshore drilling industry.
The technology is diagnostic and as retrofittable to existing VLP stacks.
Asia has been successfully tested offshore we're now working with the regulators in several customers to deploy multiple units this year.
The last technology I will discuss this hybrid onboard power.
This first of its kind solution, both reduced as fuel consumption and emissions, while providing a secondary safety source of power in the event to be complete loss of functionality of the rigs engines.
The system also eliminates peak power demand on the diesel generators to the use of stored energy, allowing the engines to run in a steadier state.
This reduces engine, where while increasing overall rig fuel efficiency.
It also alleviate the need to Rene precautionary additional engine as his current standard practice.
The hybrid system is currently in operation on the transition Spitsbergen with applicability across many assets within our fleet.
[noise] understandably, we're extremely proud to be developing and deploying technologies that continue to drive improvements in personnel safety provide additional safeguards for our assets in the environments in which we operate.
Proof drilling efficiency for our customers and reduce our environmental footprint.
Turning back to 2019 transition 128, floater awards, providing almost $890 million an incremental backlog.
Importantly, since our last earnings call, we signed contracts totaling $250 million and I'm pleased to report that for ultra deepwater work not associated with previously priced options. The average fixture over that timeframe was approximately $240000 per day, an increase of approximately 75% from where we started 2019.
I'm also pleased to report that these recent awards originated from a wide range of customers and span multiple offshore markets, reflecting the breadth of the ongoing recovery.
In the Gulf of Mexico, We signed a 200 day contract a follow on 74 day extension for the deepwater as guard with a new customer to trains Ocean Beacon offshore energy at an average day rate of $225000 per day.
While we know that the value that we create with this industry, leading asset is worth for more than $225000 per day I want to congratulate our marketing team on their resolved as they rejected an offer to re contract. This report was $30000 a day less based upon their market intelligence and are confident that better market opportunities where available.
We also signed a form of contract for the sixth generation Drillships, the deepwater inspiration telos day rate of $210000 per day.
Again, while we expect and will ultimately command a higher day rate for this asset. We're pleased that this work immediately following the completion of the inspirations current campaign.
In Trinidad we signed the Ddrthree to a one year contract for $250000 per day plus mobilization.
This contract will commence upon completion of work in Equatorial Guinea in the second quarter.
All of these pictures reflect the tightening market for ultra deepwater rigs, we discussed during our third quarter call and demonstrate why we have confidence and getting a more appropriate value for the service we deliver with these high specification assets.
Looking at the Eastern Hemisphere, Ecuador has exercised its first two options the transition inorganic at $291000 per day.
Also in Norway, Conoco has signed a four month contract for the leap Ericsson a fourth generation assets at $235000 per day again for work directly following its current campaign.
And as we look at the Asia Pacific region. The kg to has been contracted for six months. Following its current job in Australia by Woodside day rate of $250000 per day plus mobilization.
And we're pleased that Petronas is exercised an option for the deepwater novelists in Malaysia.
Again, I'm very encouraged by these fixtures day rates as they illustrate both the improvement we are seeing in the market in the discipline, we've exercised in contracting most importantly, they demonstrate our customers desire to work we transition.
Looking now to the macro oil market oil prices firms during the fourth quarter of 2019 with Brent prices remaining solidly in the mid to upper $60 per barrel range.
Even economics to the majority of our customers offshore projects continue to come in at or below $40 per barrel.
Due to a lack of investment over the past five years reserve replacement ratio has continued to decline boding well for sustainably increased activity offshore.
With all of these positive trends I'd be remiss not to acknowledge the risk of activity delays as a result of the current virus.
It's near term impact on oil demand and related effect on current oil prices impact our customers cash flow and therefore can result in delays and timing of anticipated project awards and commencement.
Epidemics of this nature typically have short term overall effects on energy consumption. The remain unknown at this time that must be acknowledged.
Returning to the longer term trends, we continue to see in the market a couple of other points remain critical.
First shale activity in North America continues to decline despite service pricing that is unsustainably low north American rig activity fell 28% year over year in 2019.
Additionally, oil supply growth from North America onshore activity in 2019 came in significantly below previous expectations. Further this growth is expected to show material declines in 2020 and beyond.
Empirically. We think this is more a structural decline as lower tier acreage is delivering lower rates of recovery than initially expected and decline rates on producing acreage or more significant than initially anticipated.
Second the discipline that continues to be exhibited by the majority of producing nations is resulting in a much more balanced market.
This is reducing the fear of a sudden potentially linked the decline in oil prices.
As longer term consumption is likely to continue growing in excess of 1 million barrels per day. We believe that these factors should support and hopefully strengthened the recovery that we are already witnessing in the offshore market.
Starting with the Gulf of Mexico as anticipated, we have witnessed significant tightening as evidenced by the number of fixtures announced over the last few months.
For the high specification assets, we see virtually sold out market for the majority of 2020 in fact, we've been contacted by customers about bringing additional rigs into the Gulf to meet their demand.
As our customers continue to realize the favorable economics offshore we are witnessing a shift in focus towards the deepwater.
The opportunities include Greenfield development tie backs and exploration.
Back some industry reports indicate deepwater exploration projects will outpace development in 2020 for the first time since 2014.
Specific to transition we remain encouraged about the prospects for a second 20000, PSR capable ultra deepwater drillship.
We continue to have advanced discussions with multiple operators regarding the need for another rig to operate in lower tertiary and believe they final investment decision to proceed could come soon.
The Mexican portion of the Gulf also presents a significant area potential for ultra deepwater activity.
Multiple operators continue to drill exploration wells and we understand that the results are very promising.
This should come with little surprise as the geology is very well understood based on activity that has occurred on the U.S. side for many years.
We drilled the first ultra deepwater wells in Mexican waters for three customers beginning in 2019, and very encouraged that a number of development opportunities that would require dedicated rigs on long term fixtures appear to be materialize.
In the Caribbean, where several contracts were recently awarded in Trinidad. We believe the continued drilling success will lead to additional rigs.
In Trinidad multiple campaigns and Guiana continue pointing towards incremental demand as new development opportunities materialize.
Neighboring certain and we also see the potential for the rig count to grow assuming recent wells successes duplicated.
In Brazil, we expect to see a number of opportunities coming to tender for Petrobras as well as several highly anticipated multiyear IC programs.
This demand will require incremental rigs in country, resulting in tighter utilization for ultra deepwater drillships worldwide.
Looking at West Africa, we are pleased to see demand further materializing, starting with Angola, where we're now seeing several I was seized with multiyear programs. After tender. We think this could require at least three incremental rigs. Additionally, there an increasing number of multiyear opportunities in Mozambique, Namibia and Nigeria to name a few at several agencies are looking to begin cash.
Pains in the second half of 2020.
In Asia Pacific the market remains tight as rigs in the region remain contracted and opportunities for new activity continued to emerge. This bodes well for continued strengthening in utilization and more importantly day rates.
In particular, Australia remains the strongest market in the region, where awards continue to support degrade solidly in the mid to high 200000 dollar per day level.
The market continues to tighten in 2020, which we believe it will rate should move towards $300000 per day.
Turning now to the harsh environment market the Norwegian North Sea continues its multi year run a strength.
2020, a number of new program should keep the market fully utilized for the high specification assets as such we would expect day rates to continue to move higher.
In Canada, the Barents, we kicking off for next campaign with equity or in the coming weeks. She has contracted into the third quarter with options that could keep on contract into the fourth quarter.
The high specification asset in country, we will understandably look to keep the Barents in Canada beyond our current contract. However, we are unable just curious suitable fixture following her campaign with Ecuador, we will consider returning her to Norway, where market conditions remain extremely favorable for the high specification harsh environment floaters.
In summary, we remain encouraged by the outlook for 2020 and beyond but we recognize that the paste and shape of the ultra deepwater recovery is dependent upon many factors that are outside of our control.
Therefore, we will continue to focus our time and energy on best positioning transition to outperform throughout the cycles.
Our focus on the high specification assets, serving the harsh environment Ultra deepwater markets is prudent wise at the bifurcation in both of these segments is increasingly evident.
As important our continued internal focus on opportunities to refine and improve our processes and procedures has enabled us to further distinguished transition from the competition as we continued to deliver wells in a manner that consistently beats our customers drilling curves and provides a competitive advantage against other contractors.
I'm very proud of the way, we continue to pursue developing embrace new technologies that improved both the efficiency and safety of our drilling operations, while furthering our sustainability through embracing the importance of years cheaper transition. The places we work in the world.
The ability of both transition in the offshore service industry as a whole to sustainably reduce breakeven levels for our customers is de risking their portfolios playing a significant role in their generation cash flow and furthering the opportunities for through the cycle investing that had been so elusive.
With a longer term macro environment that has now reflecting a significantly more stable supply backdrop than we've seen in years and it resilient demand forecasts notwithstanding the immediate uncertainty surrounding the grown of ours and short term impact we're optimistic about both near and longer term prospects for transition.
Before turning the call over to Mark I'd, just like to thank the entire transition team for your performance in 2019 may or focus on safety customer service fleet quality operational excellence and organizational efficiency continue to serve us well in 2020 Mark.
Thank you Jeremy and good day tool.
During today's call will briefly recap our fourth quarter full year 2019 results.
Provide guidance for the first quarter and full year 2020, less gelclair button updates on our liquidity focus through 2021.
As reported not detailed press release for the fourth quarter of 2019.
Reported net loss attributable to controlling interest was $51 million.
Centsper diluted share.
After adjusting for unfavorable items associated with impairment charges related to previously announced so two times.
The gain on terminations construction contracts and certain discrete tax items, we reported and adjusted net loss of $263 million.
Were 43 cents per diluted share.
For the details are included in our press release.
Highlights for the fourth quarter include fleet wide Rubin your efficiency of 96% the fifth consecutive quarter of revenue efficiency add to about 96%.
Adjusted EBITDA of $223 million, reflecting the high conversion rate.
This we leading back to go to cash and our intense focus on costs.
Cash flow from operations $147 million, driven by strong revenue performance and select collection efforts.
During the fourth quarter with adjusted contractually revenues by $259 million.
This was approximately $14 million above our guidance due to 54 more operating days during the quarter than forecasted.
And a $12 million sequential quarterly increase due largely to the contract commencement sort of deepwater quicker border and people would it make it not.
Along with a full quarter over quarter basins with translation, Oregon.
Operating and maintenance expense for the quarter was $575 million.
Expected sequential increase is largely attributable to higher level of maintenance expenditures during the fourth quarter on the in service fleet, along with a full quarter corporations within trends social worker.
General and administrative expense was $54 million for the quarter sequential decrease was primarily a result would decrease legal professional advisory fees.
As part of our long term objective to optimize our balance sheet, we repurchased approximately $50 million a mutated titian open market during the quarter.
This will save us approximately $14 million interest to maturity.
Furthermore, in early January Opportunistically access the capital markets by issuing similar $50 million a priority guaranteed senior notes due 2027.
What does this transaction, we called remaining 2023, Brody guaranteed notes with $714 million.
These retirements will occur to date.
This transaction foods extends our liquidity runway, while reducing the coupon on newly issued debt by 100 basis points.
Turning to cash flow in the balance sheet.
Ended the fourth quarter with total liquidity of approximately $3.1 billion, including cash and cash equivalents of $1.8 billion and $1.3 billion from an undrawn revolving credit facility.
In summary, our 2019 results could affect another strong year financial results. We generated 106 9 million goes the adjusted EBIDTA, resulting in $340 million of operating cash flow.
We also achieved increased adjusted contributed $100 million over 2018 with a total almost $3.3 billion would have yet.
Maybe I'll provide an update in our 2020 financial expectations.
For the first quarter of 2020, we expect our adjusted contract drilling revenues to be approximately $805 million.
The sequential decline to 603 fewer operating days in the first quarter as compared to the prior quarter, mainly related to fewer operating days in Canada.
With a full year 2020, we anticipate I'd just the contract revenue to be in line with 2019 at approximately $3.3 billion.
We expect first quarter own them expense to be approximately $570 million.
The first quarter is higher than our full year average quarterly run rate due to $12 million other service costs associated with several experiences.
$10 million related to do you want to mobilization and speaking cost with any Goodrich Canada.
$8 million due to timing of extraordinary items across our active fleet.
Mainly related to the Invictus inspiration.
And 5 million Gold district, the completion of contract specific upgrades, we're making us.
Before sequel, Im expense decreasing from the first quarter guidance in Q2 and further.
Third quarter.
Furthermore, we anticipate.
It appears to be around $2.1 billion.
We expect gene expense was quick to be approximately $48 billion inline with our 2019 neighborhoods for.
Furthermore, we anticipate full year junior experience to be approximately $183 million.
Interest expense for the first quarter is expected to be approximately $254 million. This forecast includes capitalized interest approximately $11 million.
Interest income.
Got it.
We anticipate full year net interest expense to be approximately $573 million $57 million, plus interest and $26 million interest income.
Capital expenditures, including capitalized interest for the first quarter anticipated to be approximately $120 million.
This includes approximately $84 million run Newbuild drillships under construction.
$36 million of maintenance Capex.
For the full year, we expect capex to be approximately $857 million, which includes $762 million, but two newbuild drillships and hundred $5 million operating fleet maintenance.
Our cash taxes are expected to be approximately $15 million for the first quarter.
Absolutely $60 million 2020.
Turning now to up particularly critically at December 31, 2021.
Including our revolving credit facility in considered one of available levers in the year 2021 liquidity is estimated to be between 1.2 and $1.4 billion.
This liquidity forecast includes an estimated 2020 capex or $807 billion as discussed previously.
And turning to anyone can fix of $935 million.
Turning to any one capex includes $770 million relative to the people to tighten and hundred $65 million maintenance Capex.
Please note that our capex guidance excludes any speculative rig reactivations upgrades.
Excluding our investment to industry, leading drillships, we would be free cash flow positive in both 2020 and 2021.
As it currently stands we expect to be free cash flow positive in 2022 at which time, we begin to meaningful deliveries the balance sheet.
This concludes my prepared comments.
I turn the call back over to brick.
Thank you Mark.
David We're now ready to take questions and as a reminder to all participants on this call. Please limit yourself to one additional question and one follow up question.
Thank you, Sir ladies and gentlemen, if he would like to ask a question. Please signal by pressing star one on your telephone keypad now if you are using a speaker phone. Please make sure. Your mute function has turned off to allow your signal to reach our equipment again press star one to ask a question now our first question.
I will come from Mr., James West with Evercore ISI.
Hey, good morning, guys.
Good.
So Jeremy as we look at the.
The global market right now for deepwater assets, you've got a somewhat of a short squeeze underway in the Gulf of Mexico, We're seeing both Asia and West Africa start to show signs of a nice inflection here, what's the next step needed.
Your mind too.
Move day rates meaningfully higher off this mid two hundreds level.
Well I think it's I think it's just discipline across the space I think we've demonstrated that contracting discipline here over the course of the last quarter, especially moving rates meaningfully higher than when we started the year now I think it's just I.
I think it's just a German standing of the industry, but all those involved.
The availability this high specification assets and as you say.
We are especially in the Gulf of Mexico, We're largely sold out of all by specification assets and so thats really when you start to see.
Start to see day rates move so I think it's just a combination of awareness and then discipline.
Okay, and then maybe a follow up on the.
20000 PXI potential.
For a second rig here, what what's the timing of that.
That's a warrant once we though if you or others see though.
Hi, James is ready and just to follow up on that one.
We're essentially looking it a couple of awards should be made within the before the middle of the year. So we'd expect to know that destiny and that really kind of may June timeframe, but today, there could be some activity earlier than that we just wait to see who goes first but.
Certainly encouraging to see that said I will hop in fairly soon.
Okay, great. Thanks, guys.
Thank you. Our next question comes from Conor Leno with Morgan Stanley.
Thanks, Good morning.
Good morning.
Just following up James' question, there could you walk us through if you do get a 20000 Psi Award how does it alter the capex profile for the Atlas where would it change at all relative to your current expectations.
Oh, yes kind of this is mark we would increase capex this year by approximately $60 million.
Okay, but no shifts in terms of 2020 versus 2021.
Yesterday.
Oh no.
Okay. Thanks, and then maybe just a high level one on your marketing strategy. So doesn't seem like you have a whole lot of space and the calendar for most of your active rigs right. Now so could you help us think through what it would take to reactivate some of your stacked floaters.
How do you think about sort of relative priorities within those risks.
Yes, so maybe we stated at few different times that 10, where we're not planning to reactivate rigs on spec.
We'll do so when the contract says support that.
We're really getting closer and closer to that point you know when as you'd asked before you look at day rates moving up.
It really helpful him or 20% basically between 18, and 19 and what we've seen so far in that.
Kind of fixtures that we've released where another 20% higher again, so I think you'd need to see as probably move in today could have a high two hundreds low three hundreds before you would contemplate reactivation.
Typically you're going to see mobilizations paid with that that are going to cover a lot of that.
And let me just said that we previously guided to about $50 million per rig leases were all oh seven certain assets. So you would expect to see would come associated with that contract at the high twos low threes to be able to pay that back and generate a certain amount of cash flow for the company.
All right appreciate the color.
Thank you. Our next question comes from Greg Lewis with BTI G.
Yes, Thank you and good morning, everybody.
Just wanted to follow up on ongoing Jeremy some of your comments you kind of mentioned yeah. The market side in the Gulf of Mexico, maybe customers are thinking about.
You know trying to maybe get it force other rigs into the Gulf of Mexico.
Has that resulted in any kind of any kind of extensions or interim in other words are we now seen owner or customers. Looking at me you know maybe kind of pushing out duration contracts are we kind of still too early days.
No we're definitely starting to see longer terms across the across the space and it's to your point. It is driven by the incremental demand that we're seeing from our customers and their desire to lock up these assets for longer periods of time. So now we are we're definitely seeing terms.
Lincoln and we saw that throughout 2019, yeah, I think I'd add to that to say that on the database that we're looking at 10. When you think about just from tenant not only were looking at.
30 prospects that are a year or longer but has been the expedience over the last couple of years that most of the options are being picked up. So we also kind of sliced as a couple of different ways and say 50% of the options that are picked up then we're looking at you know closer to 50 projects that would last a year longer so well.
That's pretty encouraging in terms of donations and I think it's also demonstrating that activity is up I know that while the operators are cautious as they get into this recovery.
Clearly the number of offices being taken demonstrate that there's a lot of work that said still unsatisfied.
Okay, Great and then just one more for me on the North Sea. Realizing obviously, there's a difference between operate in the south North sea horses that kind of in the Norwegian area you guys are positioned for both.
I think one of the things that people have been thinking about as you know you know strength through the through the winter and just as we look out and you have a few rigs rolling off later this year with with the with openings.
Should we should we I mean is shaping up now in the North sea that we could actually see.
A really strong activity and rig demand.
Yes, the winner or like are we at that point, yet where.
You know customers or just kind of got to be forced the kind of work it may be not there ideal time.
Yes, I think for the high specification assets should clearly seeing that that you'd expect to get to year end work for them.
Some of the lower spec.
Third third and fourth Gen rigs and the seasonality issue is kind of slowly being addressed so I think what you're going to see as if that continues to be kind of a bifurcation between those two classes of rigs and theres excessive seasonality on at the lower tier vessels I think a lot of them are going to be stacked and I think there will be taken off.
The supply.
And I think as you saw one about competitors recently announcing that there's going to stack the rig that they didn't find workflow and that you know that's prudent I mean, there's no point in paying costs. If you can't get yearend work. So I think you'll see a.
Between the factors, there's probably some supply all get taken over that would hopefully encourage folks to drill year round and even in the kind of southern claims as you as you mentioned, but certainly the high spec looks good and we'll we'll we'll monitor closely on the lower spec stuff and if we need to pull little supply out to do that then.
Then we try to make that happen.
Okay perfect. Thank you very much for the time.
Thank you. Our next question comes from Taylor's Searcher with Tudor Pickering Holt.
Hey, Thank you and good morning.
You talked about a a growing list of opportunities on the horizon at the same time, there's some incremental uncertainty as it relates though macro with Corona virus and just curious at least year to date.
Some of these all macro concerns that at any noticeable impact on on the timing if somebody in 10 years or bidding on other words.
Things that you're bidding on <unk> earlier this year have they push that all the right as a result, if some of the oil price weakness we've seen.
No not yet Taylor at these are long term plane projects and our customers typically don't have knee jerk reactions to too.
What they perceived to be short term events now if this last longer than anticipated in it and continues to grow in size and scaled and certainly you could have an impact on our customer psyche, but at this point in time, we haven't seen anything.
Yeah, I think up.
Just to reiterate the deepwater planning cycle is multiple years so.
As Jeremy said you know.
Stuff that we're seeing move ahead as a multiyear work that has been in that pipeline for some time so.
Hopefully that continues and it certainly seems to do.
Okay, and just wanted to clarify one of the earlier question you talked about the Gulf of Mexico with some of the operators, they're asking for or inquiring about the potential to move rigs from other regions into the Gulf of Mexico, given how tight and <unk>.
What you're implying that most of these rigs.
The interest from customers would they be rigs that are currently working in other regions.
Or the mix of rigs that that would currently be working now the regions with some of the idle seven facets that you have namely some of the ocean rig assets you acquired.
Yeah, I think Kevin.
The last or certainly of the active fleet.
As Jeremy mentioned before most of his booked in 2020.
Seth precisely what the inquiries are around is.
Looking at taking something that's currently stack reactivating it and as we mentioned before you know we're being very disciplined approach to make sure that is that the time on the day rate to support the investment.
But we definitely think that's going to happen in 2020.
Okay, great. Thanks.
Thank you. Our next question comes from JB Lowe with Citi.
Hi, good morning, guys.
Understood.
Her level question for me to begin with.
We've been we've we've heard from me the larger surface players in the space. There's there's been some I guess differing views on what they think that offshore activity can do.
In 2020 out from a growth perspective, you know anywhere from the mid single digits improvement on that activity level to ER to high single low double digits I guess I'm. Just wondering what you guys are kind of sitting out in the field right now and what do you guys are preparing for in terms of productivity improvement 2020.
Yes, so the.
The weighted we looked at it yet as Dan you know.
As the active supply begins to get sold I then.
No incremental supply is only going to be there when it's supported by the the economics. So the growth might not be significant but just as an example.
They projected investment for deepwater compounded annual growth rates are almost 10% each year through 20.
So.
10% investment and offshore projects is pretty significant I.
I would certainly see several more rigs added to the current active supply so cautiously optimistic that we'll see a rig counts increase through the year and then into 21 and 22 as well.
Okay, great and.
Jeremy you made the comment on X Ray exploration activity really picking up how does that affect your guys business or is it you know more rig intensive on on the exploration activity picks up just kind of how you guys think about that.
No it's not more intensive necessarily it's just it's just more demand so more opportunities pressed to put assets to work and so it. It's good to see the that we're seeing investment from our customers and exploration now in addition to the development work.
Okay, Great and then last one for me just the obligatory M&A question, what do you guys sitting out there do you think more consolidation is needed and if you could describe what you're a you know the onetime SG nay costs were in the fourth quarter that'd be great. Thanks.
[laughter] smoking a couple of there.
So in terms of M&A landscape, we've been pretty consistent in our approach. We are we're only interested in the high specification harsh environment in order to.
Floaters.
And we're not interested in pursuing any kind of transaction that would negatively impact our liquidity.
That doesn't leave a whole lot options out there for for us and so I think from from our position right now we're happy with the work that we've we've done with the fleet the acquisitions that we've made over the course last couple of years and and some of the rigs. We've retired we feel like we've got the fleet that we that we want need now as market conditions change you know obviously we are.
We are always a a stalking horse is nothing else, we will see every opportunity that that's out there but at this point in time.
Nothing that fits our scope.
And Mark a question on the Gina.
Jamie I think I've given you the response that legal professional advisory fees much of this much beyond that.
All right great. Thank you.
Thank you. Our next question comes from Mike Sabella with Bank of America.
Hey, good morning.
So I mean really appreciate the rundown of all the new technologies on the rig and so we kind of consider about getting paid for technology offering.
You started to see any better from benefit from that or is that still plenty at scale.
It's still too early on on all of these technologies quite frankly, we just deployed kind of the first edition of of 80 C and and.
The hybrid power and so we really don't have all the data that we need for that on the on the 80 C.
We are implementing on across six assets with the with Ecuador.
We have seen real value from that in fact, you know the customer will be.
Paying us, but that the points of presence that we will see by that technology. So where we are encouraged about that when it has been in the field on one of our bridge for well over a year now.
And so we have some performance improvement there, but the other technologies are still are still too early.
Is there is there an impact on cost or is it just just getting paid for increased efficiencies.
No. So there's a there's a bit of a mix actually so certainly an impact on cost to the extent that we can deliver these wells in more timely fashion.
And so that we certainly seeing with with AIDC. The some of the other technologies are really more around safe working environment, and so to get the customer to pay for that either through incremental market share and or increased day rate premium day rates is really the objective.
Perfect and then you know in the past you guys have talked about you know.
The by central by on the remaining interest then or can you just walk us through kind of current current thought process around that.
Options and maybe potential timing.
Yes. So this is mark I don't think we have progressed that any further at this stage clearly we have backlog on that regard runs through next year I would assume that the BYOD would be associated with a longer term contract award.
So that would probably be a leading indicator to see us a lucrative.
I can full control that great.
Thanks, guys.
Thank you. Our next question comes from David Smith, with Heikkinen Energy Advisors.
Hey, good morning, Thank you.
Hi, spec seven to 10, Drillships clearly bring value in the U.S. golf pretty solid day rate momentum you demonstrate that there.
As the great momentum in the Gulf Guy continue curious and how you think about that fleet outside of the golf and terms that.
Yeah, well, whether you're starting to or expect to see.
Pricing competition between the higher spec you haven't changed fleet versus the.
So yeah slightly older six to inflate and kind of how you're thinking about that that national pricing dynamic.
Yes, so Adam yes, first about the markets. So really we think about the Golden triangle. So yes, the U.S. Gulf of Mexico is looking really good but I want to mentioned Mexico itself. You know this discontinued operations in Mexico, we've seen multiple discoveries are certainly very pause.
Well results. So you look at all 18 operators in Mexico.
In various different partnerships, so and that part of the market. In addition to the U.S. is gonna be really strong going forwards.
Don't forget that still in Canada that kind of first second fleet phase of the explanation. So there's plenty of development potential and talk to that and then the other and two legs of the Golden Triangle, We often talk about our Brazil in West Africa.
In West Africa wireless, obviously individual challenges in different countries with the different governments. The number of overall rigs looks like it's moving up and there's a couple of swing states and there could be pretty ignite GDS example, if they can.
Sorry, the PSC discussions are happy with the operators then there's the potential to to consume several more rigs and kind of the final pieces, Brazil. So one.
We just continually see Petrobras coming out for tenders and you know 123 rigs at times, so very encouraging there and as we kind of indicated over the past a year or so we see petrobras, replacing their covenant.
A rig count with renewals and then the iOS ease or really the swing that's pushing those numbers up. So you got about 20, just 2022 rigs working just night.
Back to that's going to go into the Thirtys, you know and 21 so.
We're really optimistic that Brazil could swing or a big shift in demand for the ultra deepwater ships. This already improving and of course when you see that then you're going to see a lot of pricing increase and think that at the very beginning you may see the first one or two that pickup these jobs might not get a significant premium but I think.
If you a patient then you will not only get your mobilizations paid far but you should be able to come on some pretty solid day rates.
Alright, thank you.
Thank you. Our next question comes from Kurt Hallead with RBC.
Hey, good morning.
Mike or [noise].
I want to follow up on one of the marks comments you referenced I believe that you'd be free cash flow positive and 2020 2021 and 2022, just wanted to kind of or is that free cash flow positive is that after the capex numbers that you provided mark.
No actually differentiated between 2020, and 2021 decided that we would be if we did not have the 220 K rigs getting delivered this year and they didn't next year. So if you're comfortable capex wheel free cash flow positive in 2022 for the first time.
Okay. Great appreciate that a clarification then a you know Jeremy in the past you guys I've provided a you know some information about your rig rating system and what could be potentially in line you know to come but come back under the right circumstances. So when you when you kind of have refresh that dynamic and you look at that prospects for maybe high.
Hundreds or low 300000 dollar day rate, what what could be ease a ball in your mind ER and in terms of number breaks that could be activated or over the course. The next lets say you know 18 to 24 month.
Within our own fleet are you asking yeah, just within your own like yes.
Yeah, I think I think it wouldn't be unrealistic to see you know a handful of those rigs get reactivated and as Mark said earlier, we would target those are that we acquired through the ocean rig transaction that are currently.
Stacked in Greece.
And so I you know that that would be our first our first priority.
Okay, Great all right that's it for me thank you.
Thank you. Our final question comes from Chriss Snyder with Deutsche Bank.
Actually time, guys. So just following up on the questions around the Atlas and the 20 K P. S. I opportunities you guys, Oh, a sizeable chunk I think maybe in the ballpark of 600 million to take delivery of this rig or so maybe in that context, what kind of rate. You know would you guys need to go forward with deliveries should we assume it's at least in that mid four.
Hundreds, which is where the tightened came in at.
Well I think one could have opened tenders at the moment, so we'd rather not tip, our hand, and but you've seen where rates have been previously for 20 K work.
We has described many times and improving market. So put those two pieces of information together and see where you get [laughter].
Okay Fair enough fair enough then decide for the follow up question you guys reactivated two of the Ocean rig Drillships last quarter I believe they were stock for like around 18 months can you maybe just provide a little more color on this process any surprises along the way and how if at all the changes how you view additional reactivations across the fleet.
Well, so if you'll remember that were they were ocean rigs actively bidding those to read into that Petrobras contract as we were going to the transaction. So we had very little visibility to to the customer specifications and some of the upgrade that Petrobras is requesting an though so I think that piece of it was a bit of a surprise to us the additional upgrades that Petrobras wanted as part of this is Kent.
And with these two rigs other than that it when it was fairly fairly straightforward.
Alright, thanks for the time guys.
Thank you I'd now like to turn it back to Mr. Alexander for closing comments.
Thank you David and thank you everyone for your participation on today's call. If you have any further questions. Please feel free to contact me directly we look forward to talking with you again, when we report our first quarter 2020 results have a good day.
Ladies and gentleman that concludes the quarter for 2019 transmission earnings Conference call. You may disconnect your lines and thank you for joining us this morning.
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